Here are the top 10 things the IRS wants every taxpayer to know before deducting charitable donations.

1. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, Cumulative List of Organizations, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.
2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.     
3. You generally can deduct your cash contributions and the fair market value of most property you donate to  a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.
5. Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the name of the organization, or a payroll deduction record.
6. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.
7. Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
8. For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description and good faith estimate of value of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.
9. To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.
10. An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.

For more information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

• Notify the Social Security Administration Report any name change to the Social Security Administration, so your name and Social Security Number will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at www.socialsecurity.gov, by calling 800-772-1213 or at local offices.
• Notify the IRS If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).
• Notify the U.S.Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence.
• Notify Your Employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
• Check Your Withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will even provide you with a new Form W-4, Employee’s Withholding Allowance Certificate, you can print out and give to your employer so they can withhold the correct amount from your pay.

More information about the 2010 tax rates and exemptions and other tax matters is available at ftb.ca.gov.

Federal Court delays August 18, 2010 date for  same-sex marriages in CA.

August 12, 2010

The Northern United States District Court of  California lifted the temporary ban on same-sex marriages.  This means that same-sex marriages will be legal in California beginning August 18, 2010, while the ruling that Proposition 8 is unconstitutional is appealed to the higher courts.

For income tax purposes, California treated all same-sex married couples who were married prior to the ban the same as registered domestic partners (RDPs).   It appears that the same rules will apply to all same-sex couples who marry.  This means that community property rules will apply, and they will file as married for California purposes, even though they must file as single for federal purposes.

IRS has provided the following list of things you should know about the Nonbusiness Energy Property Credit:

• The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 claimed for 2009 and 2010 combined.
• The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
• To qualify as “energy efficient” for purposes of this tax credit, products generally must  ………..    meet higher standards than the standards for the credit that was available in 2007.
• Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers’ Website.
• Qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.
• The improvements must be made to the taxpayer’s principal residence located in the United States.
• To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 tax return. Taxpayers must claim the credit on the tax return for the year that the improvements are made.

Homeowners who have been considering some energy efficient home improvements may find these tax credits will get them bigger tax savings next year.

One example of allowing the Bush Tax Cuts to expire on December 31, 2010 would look like this:

Marriage and Taxes
Typical tax liability for various taxpayers for tax year 2011

Married, two earners, two children                                          $  7,235               $  5,383
earning $85000/yr
Single, no, children,     $60,000/yr                                                8,236                    7,484
Single, no children,   $150,000/yr                                              29,962                  26,996
Married, two earners, two children, $150,000/yr                     22,776                  19,268
Married, two earners, no children,   $300,000/yr                     64,181                  61,292
Married, two earners, no children,   $500,000/yr                   130,210                123,900
===================================================================

For Democrats, one possible path would be to extend the cuts for six to 12 months, avoiding the difficult political questions raised by the issue in a lame-duck session after the mid-term election.

Now several Democrats (not including Nancy Pulosi) have articulated that a short extension of the Bush Tax Cuts is a possibility.   It isn’t just deficit politics driving the discussion, but political reality on Capitol Hill.    Lawmakers are fatigued from the ambitious legislative agenda pushed since Mr. Obama took office, and there is little appetite for taking on yet another sensitive issue.

Moving Expenses If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving you and members of your household.

Combat Pay If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all your military pay received for military service that month is not taxable.   For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

Extension of Deadlines The time for taking care of certain tax matters can be postponed.  The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

Uniform Cost and Upkeep If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.

Joint Returns Generally, joint returns must be signed by both spouses. However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.

Travel to Reserve Duty If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

ROTC Students Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

Transitioning Back to Civilian Life You may be able to deduct some costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

Source:  IRS Tax Tips

Many taxpayers spend time during the summer months updating their résumé and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return.  Here are six things the IRS wants you to know about deducting costs related to your job search. 

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.

Source: IRS Newsletter

• All employees fill out a W-4, Employee’s Withholding Allowance Certificate,  when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs you will want to make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on IRS.gov.
• Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.
• Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.
• If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
• Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
• Special rules apply to services you perform as a newspaper carrier or distributor.  You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:>  You are in the business of delivering newspapers.
  >  All your pay for these services directly relates to sales rather than to the number of hours worked.
  >  You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Source:  IRS Newsletter

Each tax signals a radical change in policy.  For workers, the extra 0.9% levy puts a progressive element in what used to be a totally flat tax.  The 3.8% tax on investment income will basically apply a “payroll” tax to unearned income.  FICA taxes for Social Security and Medicare will apply to both your wages and your investment income.

While many details remain unclear and the Internal Revenue Service hasn’t issued any guidance, here are preliminary answers to the most important questions taxpayers are asking.  These taxes take effect in 2013, two elections away. Might they be repealed first?

Not likely. “Congress would have to undo the health reform, and budget constraints would still be there,” says Clint Stretch of Deloitte Tax. “Even if Republicans take control of Congress, President Obama holds the veto pen until Jan. 20, 2013.”

What is investment income?

Interest (except municipal-bond interest); dividends; rents; royalties; and capital gains on the sales of financial instruments like stocks and bonds. The taxable portion of insurance annuity payouts also counts, unless it is from a company pension. So do gains from financial trading, as well as passive income from rents and businesses you don’t participate in. All are subject to the 3.8% tax on amounts above the $250,000 or $200,000 threshold, as described above.

Not taxed: Distributions from regular and Roth IRAs and other retirement accounts, including pensions and Social Security, and annuities that are part of a retirement plan. Life-insurance proceeds, muni-bond interest and veterans’ benefits don’t count, nor does income from a business you participate in, such as a Subchapter S or partnership.

Could the 3.8% tax apply to gains on the sale of a home?

Yes, if there is a taxable gain above the $500,000 ($250,000, single) exclusion for gains on the sale of your residence.

Does the 3.8% tax affect trusts and estates?

Yes, and it can hit them hard. The tax is levied on investment income as low as $12,000 that isn’t paid out to beneficiaries. Some believe the tax may also hit children’s unearned income subject to the “kiddie tax” if the parents owe it themselves.

What professions are able to avoid this tax?

Ms. Kreider and others see a sweet spot for real-estate professionals. The law deems their rents to be “active” income, so they wouldn’t be subject to the investment tax. Often they don’t owe self-employment taxes on that rental income, either.

What steps do experts recommend to minimize these taxes, other than taking capital gains before 2013 or buying municipal bonds?

Examine both your regular and investment income: the higher your regular AGI, the more likely that your investment income will be subject to the new tax. So while Social Security and pensions don’t count as investment income, they raise AGI. This makes Roth IRA conversions even more attractive for many. “Roth withdrawals don’t raise AGI and aren’t investment income,” says Vern Hoven, a tax expert in Gig Harbor, Wash.

Source:  The WALL STREET JOURNAL, dated June 12, 2010, article by LAURA SAUNDERS

Did you know that your summer day care expenses may qualify for an income tax credit? Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation. Those expenses may help you get a credit on next year’s tax return.  Here are five facts the IRS wants you to know about a tax credit available for child care expenses.   

1. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.
2. The cost of day camp may count as an expense towards the child and dependent care credit.
3. Expenses for overnight camps do not qualify.
4. If your childcare provider is a sitter at your home or a daycare facility outside the home, you’ll get some tax benefit if you qualify for the credit.
5. The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.

You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information check out IRS Publication 503, Child and Dependent Care Expenses at:
http://www.irs.gov/publications/p503/index.html

There is one limit for loans used to buy, build, or substantially improve a residence — called home acquisition debt. There is another limit for loans secured by a qualified residence but used for other purposes — called home equity debt. Internal Revenue Code Section 163(h) (3) provides guidance for the limitations on the home mortgage interest deduction.

The law allows taxpayers to deduct interest on two categories of indebtedness secured by their residences. Acquisition indebtedness is used to acquire, construct, or substantially improve a residence, and cannot exceed $1,000,000.   Home equity indebtedness is any debt other than acquisition indebtedness and cannot exceed $100,000.     

Home Acquisition Debt is any loan whose purpose is to acquire, to construct, or to substantially improve a qualified home. It also must be secured by that home.

Taxpayers may deduct interest on the loan balance of up to $1,000,000 of home acquisition debt secured by a qualified primary or secondary residence. The limit is reduced to $500,000 for taxpayers who are married filing separately. Interest on the excess balance of home acquisition debt may be deductible as mortgage interest paid on home equity debt, subject to the general limitations for home equity indebtedness.

For example, taxpayer A borrows $700,000 against her primary residence and $500,000 against her secondary residence. Both loans were used solely to acquire the residences and required interest only payments. The loan balances total $1,200,000. Since the qualified loan amounts exceed the $1 million limit for home acquisition debt, the mortgage interest deduction is limited. If both loans have a fixed interest rate of 6% and the total interest paid for the year was $72,000, the total deductible mortgage interest would be $66,000. Taxpayer A would be able to deduct $60,000, which is the interest on the first $1 million of home acquisition debt. An additional $6,000 of interest paid would be deductible by the taxpayer as home equity interest because the excess acquisition debt over the $1,000,000 balance limitation qualifies as home equity indebtedness.

Home Equity Debt is any loan secured by a qualified residence whose purpose is other than to acquire, construct, or substantially improve a qualified home. Acquisition loans that exceed the $1,000,000 limit may also qualify as home equity indebtedness.

The interest deduction from a home equity loan is not unlimited. Taxpayers can generally deduct interest paid on the first $100,000 of a home equity loan. The home equity debt limit is reduced to $50,000 for taxpayers who are married filing separately.

If the home equity loan was used to improve the taxpayer’s first or second home – or to purchase a second home – the taxpayer may be eligible for a deduction on an amount up to $1 million or the value of the home. The deduction for home equity interest may be reduced even below the $100,000 limit if the indebtedness exceeds the fair market value of your home.

For example, taxpayer B borrows $250,000 in a home equity line of credit, and the amount he borrows does not exceed the fair market value of his house. He used $100,000 to add a new kitchen to the house. The remaining $150,000 pays for college tuition. The amount used to substantially improve your home – $100,000 – is treated as home acquisition debt as long as the taxpayer has not exceeded the $1,000,000 balance limitation. The other $150,000 is treated as home equity debt because it was not used to improve the home. Taxpayer B would be able to deduct interest only up to the $100,000 limit on the home equity debt portion of the loan.

While tax software packages may include an alert to remind taxpayers and tax return preparers that home mortgage interest deductions are limited; taxpayers need to keep good records to be able to consider these limitations when calculating their home mortgage deductions.

For most taxpayers, figuring out the home mortgage interest deduction is straight-forward. Report the interest paid from Form 1098, on Schedule A.

Taxpayers who disregard the home mortgage interest deduction limitations may be liable for the increase in tax, plus interest and penalties, computed back to the due date of the return.

Congress has extended the first-time homebuyer’s credit until October 1, 2010, but only for buyers who had a written binding contract to purchase a principal residence prior to May 1, 2010. (H.R. 5623) The extension allows homebuyers who were unable to close by the original July 1 deadline extra time to receive the credit because lenders were unable to complete paperwork in a timely manner. The President is expected to sign the legislation.

The federal credit is NOT available for buyers who purchase a residence on or after May 1, 2010.

Source:  Spiedell

The new Arizona withholding tax table is based on a percentage of gross taxable wages.  Until now, Arizona’s  withholding had been based on a percentage of an employee’s federal tax withholding.

Employees can find the new filing form A-4 online at: www.azdor.gov/forms/withholding.aspx.

The new tax law also applies to those who are receiving an annuity or pension.  They should complete a revised Arizona Form A-4P and send it to the payor of the annuity or pension.

Ref:   AZ – Senate Bill 1185 (Laws 2009, 1st Reg. Session, Chapter 2)

While these taxpayers may not use the prior-year safe harbor, they are not subject to the underpayment penalty if, in the prior year, the taxpayer: (1) had a liability of $500 or less ($250 for married filing separately); and (2) made all payments in the prior year through withholding. (R&TC §19136(c)(2))

If the penalty should not have been assessed because taxpayer meets these two tests, taxpayer should contact their tax preparer or call the FTB Tax Practitioners’ Hotline at (916) 845-7057 to request abatement.

A California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return.

Example: Bob & Joe are registered domestic partners in California. Bob’s wages for the year are $80,000. Joe’s wages for the year are $60,000. Bob and Joe are each required to file Federal income tax returns and each must report half of the total of the wages, i.e. $70,000 [(80,000 + 60,000) X 50% = 70,000].

Source:  Office of Chief Counsel, Internal Revenue Service.
Chief Counsel Advise (CCA) Memorandum Number: 201021050
Release Date: 5/28/2010

I had concerns initially that having taxes done in California while I reside in Texas may be a problem, turned out this was completely unfounded. Everything went fine without a single issue and in far better time than I would have thought.

Brian A.
Katy, Texas

Individuals between 100% and 400% of federal poverty level will qualify for refundable tax credit (“premium assistance credit”) to offset exchange-purchased health insurance premiums.

“Shared Responsibility Penalty” assessed against taxpayers who do not have health coverage.  Penalty is phased in over 3 years starting in 2014 at $95 per individual ($285 per family); in 2015 at $325 per individual ($975 per family); and in 2016 at $695 per individual ($2085 per family).

Employers with at least 50 full-time employees may be subject to penalty if not providing health insurance coverage to employees.

New 3.8% Medicare tax assessed on net investment income of individuals, estates, and trusts with income over $200,000 Single and $250,000 Married Filing Joint.

Medicare premium increases by 0.9% for taxpayers whose AGI (Adjusted Gross Income) exceeds $200,000 Single and $250,000 Married Filing Joint.

FSA contributions limited to $2,500.

Medical expense deduction increases to 10% after 2012, after 2017 for people 65 or older.

The purpose of this BLOG is to answer any specific Individual Income Tax questions you might have.

But first … CLICK ON either Fed Tax News and/or CA Tax News, on the navigation bar above, for up-to-date information on the latest tax law changes for 2010 (or 2009), as you may find your answer there.

No Luck?!  Then, enter a keyword in the search box on the top right of this screen to see if that provides the information you want/need.

Still nothing?  Then CLICK ON the number in parenthesis following the word “Comments” above (or below) i.e., Comments (0) – click on the (0), start scrolling, and at the bottom you will find a “Leave a Reply” comment box.  Submit your question there and I promise to get back to you with a response as quickly as I can.    ;-D

High profit sales AFTER 2012 can trigger the special 3.8% Medicare surtax. Starting in 2013, the new health care law imposes a 3.8% levy on investment income of singles with adjusted gross income (AGI) over $200K and marrieds above $250K.  The surtax is levied on the smaller of the filer’s net investment income or the excess of AGI over the thresholds.  Capital gains are treated as investment income.  Thus, if the surtax will hit you after 2012 and you expect the gain on the sale of your home to exceed $250K if you are single or $500K if married, gain over these thresholds will be hit by the surtax.  So it may pay handsomely to sell before the end of 2012.

The surtax can bite even harder on sales of second homes after 2012.  The home-sale exclusion doesn’t apply to them, so the surtax can hit the entire gain.

Source:  The Kiplinger Tax Letter (5/28/10)

Information reporting is required for payments of $600 or more for property or services to a non-tax-exempt corporation.